Another view on nation’s problems

This column is an attempt to further the discussion of Social Security and Medicare contained in Anthony Piel’s Viewpoint piece, which was begun in the July 21 Lakeville Journal and is completed in this edition.

Mr. Piel’s intentions appear noble for wanting to provide health care for all, but a little accounting reality is needed to understand the royal mess we’re in. The current problem is the result of decades of bad accounting, and any notion that a little dial twisting will result in “problem solved” is going to result in a truly intractable problem in the near future.

From his description, the WHO (World Health Organization) has funds set aside to pay its staff health costs and is taking in more funds than it is paying out. That’s “cash basis” accounting, i.e., expenses are recognized when you pay out cash. Mr. Piel does not mention whether the WHO’s future promised health costs are growing, nor whether there are future shortfalls looming.

It’s those future shortfalls that are the 800-pound gorilla in the room. That’s where the accounting rubber meets the road. That’s “accrual basis“ accounting, under which you recognize expenses when incurred, even though cash payments may not be made until some future time.

It is standard accounting to recognize that just because you don’t have to pay today, contractual promises to pay in the future, e.g., Medicare, are real liabilities. Accrual accounting is the standard accounting method for companies who issue public stock, but not, unfortunately, for the federal government, nor for state and municipal governments.

Whatever the state of the WHO’s health-care funding, huge and growing unfunded future Medicare and Social Security costs are what we are facing in the United States.

In the case of Medicare, the problem is not about paying for actual costs this year. Rather, the problem is that we don’t have a lock box of funds available to pay the future costs of Medicare, especially with baby boomers flooding the system, because we haven’t “accrued” or recognized these future costs properly. Despite what we might like to do for our fellow humans to make them all safe and healthy, we are constrained by what we can realistically afford to do.

I suspect most people don’t understand that the current Medicare system, as well as Social Security and Medicaid, are “defined benefit” systems. The Medicare defined benefit system is based on promises to pay for future medical expenses for a certain class of people — senior citizens currently over 65, as well as future seniors as they reach 65.

There’s nothing inherently wrong with such a system. The problem comes in not setting aside the actuarially required funds to pay for future expenses. We have not set aside even remotely sufficient funds for decades and now face a Medicare shortfall that has been estimated to be in excess of $50 trillion. Social Security and Medicaid also face large shortfalls for the same reason.

All the noise we are hearing lately about the national debt ceiling is related to a debt of about $14 trillion (likely to go to over $17 trillion when the government raises the ceiling in the next week).

The national debt is separate from the Medicare liabilities. Incredibly, $14 trillion is relative peanuts compared to the unfunded entitlements liabilities of Medicare, Social Security and Medicaid. No amount of taxation or tweaking can recoup such an astronomical shortfall.

To deny these numbers is to live in a Harry Potter world of magical sprouting money. All we can realistically do is to reform the approach for citizens below a given age — some have suggested 55. By freezing the pool of people being paid out of the current system, we can work down this huge liability — but, most importantly, not keep increasing it.

One approach for those under 55 is to create a “defined contribution” Medicare system, in which what citizens get out of the system is defined by what citizens put in plus investment returns from monies set aside.

The critical difference is money is actually placed into the plan, assuring no repeat of our current problem. A very large pool of savings will accumulate for future retirees. The very structure of a defined contribution system is that the funds from payroll taxes are put away every year, so it can never go insolvent.

If we don’t change our approach, entitlement liabilities will overwhelm the country’s budget. This is not Chicken Little. It’s not political, neither Republican nor Democrat. It’s pure accounting and math. Vast, long term nonfunding is the real underlying issue and so far, with an exception or two, none of our politicians is discussing it, let alone making a serious attempt at solving it.

Food for thought: Accumulating $1 trillion at the rate of $1 million a day takes over 2,700 years; $50 trillion at that rate takes over 135,000 years.

Richard Shanley, CPA is a retired audit partner of the accounting firm of Deloitte & Touche. He lives in Salisbury.